India's China Problem

December 16, 2001

By Bruce Einhorn With the war in Afghanistan moving closer to a successful ending, people in India's business and information technology elite can get back to one of their favorite pastimes: worrying about China.

While India has long enjoyed the upper hand in its longstanding rivalry with Pakistan, New Delhi doesn't have that advantage with Beijing. China and India are the world's two largest nations and seem to have a number of similarities: populations of more than 1 billion each, magnificent cultures dating back thousands of years, Western domination during colonial days, socialist legacies from misguided policies in the 1950s and 1960s, widespread poverty in the countryside and cities, and an abundance of skilled workers produced by top-notch universities.

Yet, it has been China that has fascinated the West for two decades now. It's China that attracts the billion-dollar investments from multinationals. It's China that creates a worldwide buzz, thanks to its entry into the World Trade Organization. It's China that has the world's fastest-growing PC market, the most interesting new center of semiconductor production, and the most attractive population of new middle-class consumers.

MUDDLING ALONG. Last summer, China surpassed the U.S. to become the world's largest market for mobile-phone users. By contrast, India's entire mobile-phone population of 5 million is about what China adds each month.

Meanwhile, India has muddled along, with only a few industries -- software and pharmaceuticals are the two most prominent -- to create some excitement. The coming initial public offering of Indian mobile-phone operator Bharti Televentures is drawing interest from investors keen on the growth potential of the country's market (see BW Magazine, 12/17/01, "Calling All Indian Investors"). Some multinationals talk of India being an important new market, especially as the U.S. and other developed economies suffer from the global recession.

India's achievements should be kept in perspective. Its economic reforms pale in comparison with those in China, which helped to transform cities like Shanghai from decrepit has-beens into futuristic metropolises in less than one generation. While the skyline of Shanghai's new Pudong district is dominated by shiny skyscrapers with space-age flourishes at the top, Bombay is still a low-rise sprawl of beautiful but decaying buildings left over from the British Raj and some of the filthiest, most heart-wrenching slums in Asia.

"LIGHT YEARS BEHIND." To get a sense of the angst that China's rise creates in the minds of some Indians, consider this e-mail that a colleague received from an Indian friend who had recently traveled to Shanghai:

"China was mind-boggling. When in Shanghai, you have to pinch yourself hard to remind yourself that you are not in New York or Paris. It is so elegantly planned, with quadruple-layered freeways, with orchids and creepers growing underneath the base columns. It's amazing what the Chinese Government has achieved. You see clear evidence of where those billions of dollars of foreign direct investment have gone: into great infrastructure, roads, middle class housing, great power supply etc.

"When you compare the place with India, you just want to break down and cry: we are light years behind and never going to catch up. Also, the Chinese make it clear that by 2008, they will be the No. 1 power on this planet. India's IT industry has at best two years left in the limelight.

"Start learning Mandarin now."

Of course, it's too early to write the obituaries of Bangalore, India's software hub. Throughout the 1990s, such Indian software powers as Infosys, Wipro, Satyam, and Tata Consultancy Systems grew by providing smart engineers to do work outsourced from Western multinationals. The Indians have built up a level of trustworthiness that the Chinese are going to be hard-pressed to match. The English-language skills that matter in the industry are quite common in India. And don't forget that India is a democracy with the sort of freedoms that Chinese can only dream about.

LOW MARGINS. Clearly, the Chinese government is anxious to build up its local software industry so that it can start competing more directly with India. Beijing doesn't want China just to be a hub for info-tech hardware, since that business is often a commodity game with very low margins.

The question that Indians have to be asking themselves is whether they want to be free-traders, cooperating with -- and profiting from -- China's attempt to build a software industry. Or do the Indians want to turn protectionist, making sure that they guard their IT sector for as long as possible?

It's unclear which way India will go. The country has allowed some Chinese penetration. Chinese engineers are studying English in Hyderabad, a city in southern India that's home to many IT and pharmaceutical companies. Down in Bangalore, one of the most prominent Chinese telecom companies, Shenzhen-based Huawei, has an operation. That was already controversial among many Indians even before the news hit the local papers last week that the company was suspected of doing work for the Taliban in Bangalore. The accusations, which the company denies, just might make Indians even warier about the intentions of Chinese companies.

NOT A ZERO SUM. Even so, some signs also show that at least a few Indian IT companies recognize that the industry depends on openness, and that China's drive to build a software industry doesn't make it a zero-sum game. In early December NIIT Ltd., India's top IT training company, announced that it was planning a big expansion in China. NIIT hopes to open 100 centers across the country next year. Last month, a small Indian software company, Zensar, announced that it was forming a joint venture with Hong Kong-based Asia Logistics to focus on the Chinese market.

I suspect that more Indian companies will be following the Zensar model. Indians are still living with the painful consequences of having tried to wall off their economy from the rest of the world in the 20th century. I doubt that they'll make the same mistake in the 21st. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online